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Sun Pharma: Better than its peers? - Views on News from Equitymaster
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Sun Pharma: Better than its peers?
Jan 4, 2006

Sun Pharma is the fifth largest pharma company in the domestic market with a strong focus on the lifestyle segment and increasing forays in the international markets. In this article, we take a look at the company’s performance over the last five years and study the prospects going forward.

Company background
Sun Pharma is a leading domestic pharma company with a 3.27% market share (as per Aug 2005 ORG IMS MAT data) and a strong presence in the lifestyle therapeutic segment such as cardiology, neurology and diabetology. It started focusing on the exports market by acquiring Caraco Pharma in the US in FY02. Further, it increased its stake in the latter in FY04 to 61%, thus taking over the majority control. Exports contributed to around 40% to the company’s revenues in FY05. With the help of Caraco, the company has been able to grow its US business, which brings in synergies with Sun's business by backward integration in both manufacturing and R&D.

A look at the numbers
  FY01 FY02 FY03 FY04 FY05 CAGR (%)
Net sales (Rs m) 5,444 6,712 8,042 9,459 11,563 20.7%
Net sales growth (%)   23.3% 19.8% 17.6% 22.2%  
Operating profit (Rs m) 1,545 1,994 2,784 3,950 4,297 29.1%
Operating profit margin (%) 28.4% 29.7% 34.6% 41.8% 37.2%  
Operating profit growth (%)   29.1% 39.6% 41.9% 8.8%  
Net profit (Rs m) 1,352 1,681 2,487 3,157 3,962 30.8%
Net profit margin (%) 24.8% 25.0% 30.9% 33.4% 34.3%  
Net profit growth (%)   24.3% 48.0% 26.9% 25.5%  

A peep into the past
Outpacing its peers: Sun Pharma’s revenues have shown an impressive 21% CAGR in the last five years. This growth has come about largely on the back of a strong 44% CAGR in exports. While the company is competing in the US generics market through its US-based subsidiary Caraco Pharma, it has a presence in 26 markets across South East Asia, Russia, China, the Middle East and Africa. Sun Pharma has been focusing on launching products of technological complexity, which has enabled it to create a niche for itself. This has also played an important role in its exports growth.

On the domestic front, the company has differentiated itself from other players in the sector due to its focus on the faster growing chronic therapy segments and technically complex specialty products. These chronic therapy segments now contribute 74% to the total sales. In fact, over the last five years, the domestic formulations business grew at a CAGR of 16%, outperforming the industry CAGR of 9%.

Peer comparison
FY05 Sun Pharma Ranbaxy* Dr.Reddy's Cipla Glaxo*
Net sales growth (%) 22.2% 13.0% -5.0% 18.4% 23.3%
Operating profit margin (%) 37.2% 18.4% 4.3% 19.3% 28.3%
Net profit margin (%) 34.3% 12.9% 1.8% 18.8% 24.0%
* CY04 numbers

Caraco deal: In 2002, Caraco signed an agreement with Sun Pharma Global, a wholly owned subsidiary of Sun Pharma, for transfer of 25 products over the course of five years. As per the agreement, Sun Pharma would get a certain stake in Caraco in lieu of every ANDA filed by Caraco for which Sun Pharma will be the technology provider. The increased ANDA filings by Caraco over the years has upped Sun Pharma’s stake to the current 64%. Being a loss making company initially, the increased product filings also enabled Caraco to stage a turnaround in 2002. As of FY05, there were in all 22 ANDAs pending approval between Sun Pharma and Caraco.

However, of late, Caraco has been witnessing pressure on its margins on the back of severe price erosion in the US markets (affecting all domestic companies present in the market). This led to 10% to 15% price erosion for Caraco’s major products. This pricing pressure is expected to continue in the coming year as well.

Margins and profitability: Sun Pharma has consistently maintained margins above 28% in the last five years, due to increased contribution from its export business (which have relatively better realisations than domestic business). The operating margins are much higher than its domestic peers Ranbaxy, Dr. Reddy’s, Cipla and the MNC companies Glaxo and Aventis. Transfer of Caraco Pharma's manufacturing activities to the Indian plants, has also led to the margin expansion. In fact, the company’s raw material costs (28% of sales in FY05) are much lower as compared to Ranbaxy (35% of sales), Dr. Reddy’s (33% of sales), Cipla (50% of sales) and Glaxo (43% of sales).

Acquisitions have also helped: Sun Pharma, over the years, has picked up stakes in companies in a bid to improve its product profile. Besides Caraco, TDPL, a company with an extensive product offering (oncology, fertility, anesthesiology, pain management) was merged with Sun Pharma. To establish a presence in ophthalmology, Sun Pharma merged Milmet Labs into itself. The acquisition of Phlox Pharma is expected to enable Sun Pharma establish a presence in the cephalosporins segment.

Recently, the company acquired two manufacturing facilities at Hungary and Ohio, US. While the Hungarian acquisition will increase Sun Pharma’ bulk capacity and enable it to strengthen its presence in the international markets, the Ohio acquisition will equip the company in filing new products in the US markets.

Cost break-up
(% of sales) FY01 FY02 FY03 FY04 FY05
Raw material costs 44.1% 45.8% 35.5% 25.2% 28.0%
Staff costs 6.8% 6.5% 8.5% 10.2% 10.1%
Other manufacturing expenses 5.1% 3.9% 5.2% 6.0% 7.1%
Advertising & selling expenses 6.2% 6.0% 4.7% 3.7% 3.0%
Administrative expenses 7.7% 6.9% 7.5% 10.8% 12.5%

What to expect?
At the current price of Rs 683, the stock is trading at a price to earnings multiple of 22.3 times its annualised 1HFY06 earnings. With its US subsidiary now turning profitable, the company is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma in the US markets. However, the pricing pressure in the US is likely to be an area of concern going forward. Also, being a dominant player in the lifestyle segment, the company is likely to see a good growth rate going forward, as these segments are currently amongst the fastest growing therapeutic segments in the domestic market.

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